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Payday Lenders Thwart Limits

The payday loan industry, threatened by Congress with extinction, has deployed well-connected lobbyists and hefty sums of campaign cash to key lawmakers to save itself.

The strategy has paid off.

Now a top Democrat who once tried to ban the practice is instead pushing to regulate it - a result, he says, of the industry's lobbying clout.CBS News reported on the some of the predatory tactics of the payday lending industry. A marketing document from a payday lender obtained by CBS News showed that the target customers were "single-parent households with multiple children," who are "financially stressed." Read the story hereThe lawmaker, Rep. Luis Gutierrez, D-Ill., says his bill does have crucial protections for borrowers and represents the best deal he can manage in the face of the industry's aggressive lobbying. Consumer groups are condemning the bill as a loophole-riddled gift to the industry.

"While they may not be JP Morgan Chase or Bank of America, they're very powerful. Their influence should not be underestimated," Gutierrez, the top Democrat on the Financial Services subcommittee in charge of consumer credit issues, said in an interview this week.

Payday loans are small, very short-term loans with extremely high interest rates that are effectively advances on a borrower's next paycheck. They're typically obtained when a borrower goes to a check-cashing outlet or an online equivalent, pays a fee and writes a postdated check that the company agrees not to cash until the customer's payday. Finance charges typically amount to annual interest rates in the triple digits, around 400 percent, and can go as high as double that.

The loans are controversial, with advocates, including many black and Hispanic lawmakers and interest groups, arguing they are the only quick credit option for millions of low- and moderate-income people. Critics contend they are inherently abusive products that trap borrowers in a devastating debt cycle.

Congress moved in 2006 to effectively ban payday lending for military personnel by imposing a 36 percent interest-rate cap for such borrowers, and 15 states either prohibit it outright or have similar caps. But the loans are virtually unregulated in two dozen other states, a situation that Gutierrez said is intolerable.

"Doing nothing is being on the side of the industry. We are reining in their fees and their most onerous ability to cause pain on consumers," Gutierrez said.

Indeed, the payday lending industry is pushing back strenuously against Gutierrez's measure, which it says would devastate its business. The measure would cap the annual interest rate for a payday loan at 391 percent, ban so-called "rollovers" - where a borrower who can't afford to pay off the loan essentially renews it and pays large fees - and prevent lenders from suing borrowers or docking their wages to collect the debt.

But consumer groups say the legislation would do little to crack down on the most egregious payday lending practices. They argue it would for the first time lend federal legitimacy to usurious loans and undermine successful efforts under way in several states to slap tougher limits on it.

"We don't believe that this is going to protect consumers. It would in fact condone the payday lending that can be extremely harmful to the people who can least afford it," said Jean Ann Fox of the Consumer Federation of America.

She testified Thursday before Gutierrez's subcommittee on behalf of seven consumer groups that are outraged about the measure. They're pushing to cap all lending interest rates at 36 percent annually.

The payday lending industry's trade association has spent more than $1 million annually for each of the last four years lobbying Congress, including $1.4 million last year, according to disclosures filed with Congress. It has beefed up its team of Washington hired guns to a dozen, including well-connected financial services lobbyists Tim Rupli and Wright Andrews, who each have firms bearing their names.

It also has stepped up its campaign giving in recent years, forming a political action committee that contributed more than $200,000 in 2007 and 2008, much of that to lawmakers who serve on the Senate Banking and House Financial Services committees, according to Federal Election Commission filings compiled by the Center for Responsive Politics. The committees have jurisdiction over the industry.

Individual payday lending companies also have moved to defend their interests in Washington.

Cash America Inc. hired lobbyists and started a political action committee that gave more than $170,000 to candidates. Advance America Cash Advance, another leading payday lender, gave $102,848 to campaigns in the run-up to the 2008 elections.

"As the Hill has become more interested in our industry, we have stepped up our efforts," said Steven Schlein of the Community Financial Services Association, the trade group for payday lenders.

Having focused its past efforts on state laws, he said, the group hired more Washington lobbyists to press its argument that in a time of tightening credit, Congress shouldn't be making it more difficult for their industry to lend to people who are most in need of quick cash.

"Congress is beginning to realize that there aren't other alternatives," to payday lending, Schlein said.

A newer player representing Internet payday lenders - a growing segment of the market - also ramped up its lobbying and political giving efforts. The Online Lenders Alliance, formed in 2005, nearly quintupled, to $480,000, its lobbying expenditures from 2007 and 2008. It contributed $108,400 to candidates in advance of the 2008 elections compared to about $2,000 in the 2006 contests. Gutierrez was among the top House recipients, getting $4,600, while the top Senate recipient was Sen. Tim Johnson, D-S.D., a Banking Committee member who got $6,900.